AVEVA Group Plc

AVEVA Group Plc (LON: AVV) is a Cambridge-headquartered engineering & industrial software company, which creates industrial software that inspires people to shape a sustainable future.

Rationale for Valuation – Buy at GBX 3,820.00

• The Company expects revenue growth in FY21 and strong order pipeline for the rest of the year.
• The company's debt/equity ratio in the past three years was considerably below the industry median. In H1 FY21, the debt/equity ratio was 0.04x.
• In the last six months, the Company has delivered a sparkling return of ~12.35%, which was higher as compared to the FTSE 100 Index.
• From the technical standpoint, shares are trading well above the short-term support level of 20-day (GBX 3,537.27) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The outbreak of covid-19 mayhem impacted the Company's operational performance as it resulted in contract losses and delay in project delivery.
• The potential uncertainties arising from regulatory changes, dependency on cyclical markets, global economic disruption, an extended period of remote working and disruptive technologies.

Trading Update (for the nine months ended 31 December 2020, as on 15 January 2021)

• In the three months to December 2020, the Company had a strong quarter of contract renewals, with an increase of more than 26% in revenue.
• In 9M FY21, the revenue increased by around 1.5% (on an organic constant currency basis), with an increase of 10% in recurring revenue.
• For the remainder of the financial year 2021, the order pipeline was solid, supported by several large contract renewals and efficient digital demand generation.
• On 31 December 2020, the Company has cash of £2.7 billion, with no debt.
• In the financial year to 31 December 2020, OSIsoft (acquired Company) achieved billings growth of 8.5% and continued to perform well, with strong growth in the Chemicals & Petrochemicals, Pharmaceuticals & Life Sciences and Power Generation & Distribution markets.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has received (through the acquisition of OSIsoft) the antitrust and regulatory clearances and expects CFIUS (Committee on Foreign Investments in the United States) approval by early February 2020. The Company saw several large contract renewals and efficient digital demand generation, with revenue growth and strong order pipeline. Further, AVEVA's position will be strengthened by the proposed acquisition of OSIsoft. The Board also remains confident in the outlook for the 2021 full year, with strong digitalisation in the industrial world and significant growth opportunities ahead. The stock made a 52-week low and high of GBX 2,112.97 and GBX 4,302.95, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on AVEVA Group at the current market price of GBX 3,820.00 (as on 25 January 2021, before the market close at 8:21 AM GMT), with lower double-digit upside potential based on 55x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Sage Group Plc

Sage Group Plc (LON: SGE) is a FTSE 100-listed provider of business software and solution in North America, North Europe, Central Europe, Africa, Middle East, Asia and Latin America.

On 4 February 2021, the Company will hold its Annual General Meeting.

Rationale for Valuation – Buy at GBX 612.20

• In the first quarter, the Company performed in line with expectations and saw a growth in software subscription. Also, the Group's balance sheet remains strong.
• As per valuation metrics, EV/Sales, Price/Earnings, Price/Cash Flow and EV/EBITDA multiples of the SGE are currently lower as compared to the corresponding multiples of the Software & IT Services industry.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above the industry median.
• From the technical standpoint, shares are trading well above the short-term support level of 20-day (GBX 581.30) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.
• Being a Technology Company, SGE needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the Company’s financial performance.

Trading Update (for the three months ended 31 December 2020, as on 21 January 2021)

(Source: Company Website)

• Led by successful strategic execution, the trading update was in line with expectations.
• The recurring revenue surged by 4.7% year-on-year, with an increase in software subscription of 11.3% YoY.
• As per region-wise, North America recurring revenue increased by 6.4% YoY and Northern Europe recurring revenue surged by 3.3% YoY. In other regions, the performance was largely in line with expectations.
• Total Group revenue for Q1 FY21 increased by 1.4% YoY to £447 million.
• The Company has shown a strong balance sheet, with £1.2 billion of cash and available liquidity and £129 million of net debt.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In Q1 FY21, the Company saw a growth in recurring revenue, with good demand for Sage Business Cloud solutions. It also saw strong growth in cloud-native revenue, with new customer acquisition. The Company has mentioned that there is a limited impact on the Group’s business on account of COVID-19. Overall, the sustained investment in Sage Business Cloud throughout the economic cycle will form a robust base for the long-term success of the Group. The stock made a 52-week low and high of GBX 515.60 and GBX 794.60, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Sage Group at the current market price of GBX 612.20 (as on 25 January 2021, before the market close at 8:22 AM GMT), with lower double-digit upside potential based on 29.10x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

* Dividend Yield may vary as per the stock price movement.

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